Stock futures and global markets slumped, with tech dragging the indices lower, after disappointing results from Tesla and Alphabet were followed by lackluster reports from LVMH and Deutsche Bank in Europe. The first Mag7 earnings results were - as we warned in "Now Comes The Hard Part: AI Stocks Face Brutal Q2 Earnings Day Of Reckoning" - a flashing red warning with TSLA tumbling 7%, GOOG down -3%, and the rest of the Mag7 all lower. The yield curve is steepening with 2Y seeing follow-thru buying following yesterday’s strong auction. USD is stronger and commodities are weaker excluding energy. Today’s macro data focus is on Flash PMIs, New Home Sales/mortgage applications, and Inventories.
In premarket trading, it was all about the carnage in the first Mag7 reporters: Tesla shares plunged 8% in premarket trading after the company reported profit which missed estimates and postponed the unveiling of its highly anticipated autonomous robotaxis. Alphabet shares drop 3.4% as analysts highlight weakness in YouTube and higher capex spending. However, Google’s parent company reported second-quarter results that beat expectations on other key metrics. Here are some other notable US premarket movers:
Almost a month after our warning that this earnings season will be ugly (see here), analysts are poring over this week’s raft of earnings for signs that the tech-driven rally of the first half of the year has longer to run.. and so far they aren't finding them. The market is facing pressure into the summer months, with volatility also likely to be heightened by uncertainty as the US presidential race gathers pace. Hopes for the so-called Magnificent Seven are lofty. Analysts project profits at these companies to have jumped 30% in the second quarter, compared with a 10% increase for the S&P 500 as a whole, according to data compiled by Bloomberg Intelligence.
“What we’re seeing during this earnings season is the growing gap between the rather optimistic profit consensus from analysts and slowing economic growth,” said Benoit Peloille, chief investment officer at Natixis Wealth Management. “With unemployment now on the rise, earnings disappointment is to be expected and that’s what we’re seeing this season. This is true for the US and to some extent for Europe.”
So far, about a fifth of S&P 500 companies have reported results. Analyst estimates slid ahead of the season as they usually do, but market strategists including Morgan Stanley’s Michael Wilson and Barclays’ Emmanuel Cau have warned that the downgrades have been milder on this occasion, setting the bar for positive surprises higher. Investors appear particularly worried about sales, with less than half of companies beating expectations.
“Mixed earnings, alongside softening activity data and high political uncertainty keep markets on edge,” said Barclays’ Cau.
Major European markets are all lower with most down at least 1 sigma: Spain is outperforming, and France is lagging. Eurozone PMIs were weaker than expected, missing Mfg, Services and Composite as well as printing lower MoM. The Stoxx 600 is down almost 1% led lower by consumer product names and banks: Deutsche Bank dropped on its first quarterly loss in four years and scrapped plans for a buyback Germany’s largest lender said trading slowed and that it would most likely refrain from conducting a second share buyback this year, after a €1.3 billion ($1.4 billion) litigation provision tied to its Postbank retail unit. LVMH tumbled 6.5% to a six month low after sales in China plummeted during the quarter, adding evidence that an economic slowdown is hurting European companies and that even the strongest brands are succumbing to a slowdown in demand for high-end items. Analysts flagged a hit from currency movements as well as weakness in China. Here are the other notable European movers:
In FX, the dollar is steady. The yen is the best performer among G-10 FX, extending gains versus the dollar after a Reuters report said the BOJ will weigh raising interest rates at its meeting next week. The euro slipped as European data showed private-sector activity barely grew.
In rates, treasuries hold small gains in early US trading Wednesday, led by short maturities following record foreign demand for Tuesday’s 2-year note auction; 10Y yields edged lower to 4.23% as investors awaited US debt auctions and manufacturing PMI data, while yields in the 2-year sector are more than 2bp lower on the day near session lows, further steepening the yield curve. With 10- to 30-year yields lower by only ~1bp, key curve spreads are approaching year’s steepest (or least inverted) levels; new 2-year note’s yield is less than 20bp higher than 10-year note’s, the smallest margin since January. The supply cycle continues with $70b 5-year note sale at 1 p.m. New York time. German and French 10-year government bonds are little changed and the euro is slightly lower after soft PMI data from the bloc, most notably in manufacturing. Gilts are also steady after the UK figures were more encouraging while the pound has pared an earlier fall.
In commodities, oil prices advance, with WTI rising 0.9% to ~$77.70 a barrel. Spot gold is steady around $2,413/oz.
Today's US economic data calendar includes June preliminary wholesale inventories and June advance goods trade balance (8:30am), July preliminary S&P Global US manufacturing and services PMIs (9:45am) and June new home sales (10am). Fed Governor Bowman and Dallas Fed President Logan are slated to give opening remarks at an event on Texas community partnerships at 4:05pm, the only scheduled appearances until after the next FOMC meeting ends July 31
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APAC stocks were mostly rangebound with a negative bias seen following the lacklustre handover from Wall Street after risk appetite was dampened by underwhelming earnings results. ASX 200 was indecisive and briefly clawed back early losses with sentiment clouded by mixed Flash PMI data. Nikkei 225 retreated at the open amid headwinds from a firmer currency, while PMI data was also varied. Hang Seng and Shanghai Comp. were subdued with early pressure from demand concerns after China's slowdown weighed on luxury spending which was evident in the 14% decline in LVMH sales in the region, while Chow Tai Fook Jewellery was among the worst hit in Hong Kong after its quarterly group retail sales fell 20% Y/Y. However, the mainland bourse managed to recover losses to return to relatively flat territory after rebounding from a brief dip beneath the 2,900 level.
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European bourses, Stoxx 600 (-0.9%) began the session on a weaker footing, and sentiment has continued to dwindle as the morning progressed; as it stands indices resides at lows. Today’s European PMI releases have been poor, with Germany’s composite surprisingly falling into contractionary territory, whilst the EZ managed to stay in expansionary territory and noted that its GDP Nowcast still pointed towards growth in Q3. European sectors hold a strong negative bias, with only Travel & Leisure remaining afloat, which is assisted by post-earning gains in easyJet (+5.7%). Consumer Products is the clear underperformer, after LVMH (-4.7%) results, which has also weighed on peers. Banks are also towards the foot of the pile, given the significant losses in Deutsche Bank (-6.7%).
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DB's Jim Reid concludes the overnight wrap
The Olympics unofficially starts today in Paris ahead of Friday's opening ceremony. The five of us are going to Paris for a long weekend in two weeks' time to a) watch the synchronised swimming finals (artistic swimming as it's now called), and b) go to EuroDisney. I've refused to waste good money on tickets for the twins for the artistic swimming so we'll be roaming the streets in Paris while my wife and Maisie go. In addition I'll be also trying to find some urgent client meetings to do in Paris which means I can avoid two days at EuroDisney. Help!
The market’s torch has shone slightly less brightly in the last 12 hours with the S&P 500 (-0.16%) losing some late traction after Monday’s rebound with S&P (-0.65%) and Nasdaq (-0.95%) futures notably lower this morning after a soft start to Mag-7 earnings after the bell. At the close last night the S&P 500 declined for the fourth time in five sessions, the first such occurrence since April, and having seen its biggest 3-day fall since October at the back end of last week. These choppy markets come as the focus is now squarely on earnings season. Alphabet and Tesla last night will be followed by Apple, Meta, Microsoft and Amazon next week but with Nvidia the laggard on August 28th.
Those tech earnings started on an underwhelming note last night. Alphabet did post a modest revenue and earnings beat, boosted by cloud computing and advertising growth, but its shares slid -2.2% in post-market trading after the management call alluded to upcoming expense pressures. Meanwhile, Tesla fell by -7.7% after-hours as it missed earnings expectations for a fourth consecutive quarter and delayed its Robotaxi event until October. Both Alphabet and Tesla had earlier fallen by about 1% in the final 30 minutes of regular trading (they were +0.07% and -2.04% on the day respectively), contributing to a weak equity close.
Earlier yesterday, we had plenty of other results that dictated the market narrative. For instance, Spotify (+11.96%) had its best performance since January 2023 after announcing a record profit, along with growth in paid subscribers of 12% from the previous year. Other outperformers included General Electric (+5.68%), which had its best day since April after raising its guidance, whilst SAP (+7.15%) had its best day since January after their own results. That said, it wasn’t all good news, as UPS (-12.05%) saw the biggest daily decline in its share price since it first went public in 1999, after its earnings missed estimates.
Amidst all those results, equity indices had a mixed day across both sides of the Atlantic. In the US, both the Magnificent 7 (-0.05%) and the NASDAQ (-0.06%) saw marginal losses, but small caps had an excellent day, with the Russell 2000 up +1.02% and with the more cyclical sectors leading the upside. Over in Europe the STOXX 600 was marginally higher (+0.13%) amid strong gains for Germany’s DAX (+0.82%), itself helped along by the SAP advance mentioned above. But there were losses for the UK’s FTSE 100 (-0.38%) and France’s CAC 40 (-0.31%).
Meanwhile for sovereign bonds, there were gains on both sides of the Atlantic. In part, that came amidst a fresh decline in oil prices, which added to hopes that inflationary pressures were waning. Indeed, WTI crude was down -3.53% yesterday to a one-month low of $76.96/bbl. Alongside that, there was some weaker second-tier data out of the US, which cemented investors’ confidence that the Fed were on course to cut rates at their September meeting. The data showed existing home sales were down -5.4% in June (vs. -3.2% expected), taking them down to an annualised rate of just 3.89m, their lowest in six months. Separately, the Richmond Fed’s manufacturing index was down to -17 in July (vs. -7 expected), which is its lowest level since May 2020 during the Covid lockdowns.
With growing conviction about future rate cuts, that helped push yields on 2yr Treasuries down -2.6bps to 4.49%, whilst those on 10yr Treasuries were down - 0.2bps to 4.25%. Front-end outperformance was aided by a very strong 2yr auction which saw $69bn of bonds issued 2.3bps below the pre-sale yield as primary dealer take up fell to its lowest since the start of the data in 2003.
The bond gains were larger in Europe, but there was also a fairly sharp widening in sovereign bond spreads there, with those on 10yr bunds down -5.7bps, whereas those on 10yr OATs (-1.9bps) and BTPs (-2.6bps) saw much smaller declines. Indeed, the Franco-German spread moved back up to 69bps, which is its widest level since the second-round election results that led to gridlock in the National Assembly. On the topic of French politics, yesterday we heard that the left-wing New Popular Front alliance agreed to put forward Lucie Castets, an official for the city of Paris and relatively unknown, as their candidate for prime minister. As a reminder the left-wing finished first in the election but well short of a majority. It will now be up to President Macron whether to nominate her as PM. Last night he commented that he would not appoint a PM until after the end of the Paris Olympics (on August 11).
In terms of US politics, it’s become clear that Vice President Harris has all-but-won the Democratic nomination, setting up a November general election contest with Donald Trump. As mentioned yesterday, the Associated Press have surveyed the Democratic delegates, and found that a majority of them support Harris as the nominee. And even though they could change their minds in theory, no other challenger has emerged against Harris, who has received endorsements from right across the party. Tonight we’ll also hear from President Biden, who’s delivering an Oval Office address at 8pm Eastern Time.
Those overnight losses on Wall Street are echoing across Asian equity markets this morning. Across the region, the Hang Seng (-0.59%) is leading losses with the Nikkei (-0.22%), the KOSPI (-0.11%) and the CSI (-0.10%) all trading slightly lower while the Shanghai Composite (+0.01%) is holding in slightly better.
Early morning data showed that Japan’s flash manufacturing PMI fell to 49.2 from the previous month’s 50.0. However, the weakness in manufacturing sector was largely offset by the flash services PMI surging to 53.9 in July from 49.4 in June. The latter reading was the strongest expansion since April, and came amid improving consumer demand and confidence. As a result, the flash composite output index rose to 52.6 in July from 49.7 in June.
On the back of this, the Japanese yen (+0.44%) continues to gain ground for the third consecutive day trading at 154.91 against the dollar. Meanwhile, the Bank of Japan (BOJ) is scheduled to meet next week with around 30% of economists expecting a hike, albeit with pretty much all saying the balance of risks are biased towards a hike around their central case scenario.
To the day ahead now, and data releases include the flash PMIs for July from the US and Europe. Other US data includes new home sales for June, and the advance goods trade balance for June. From central banks, we’ll get a policy decision from the Bank of Canada. And we’ll also hear from ECB Vice President de Guindos, the ECB’s Lane, and the Fed’s Bowman and Logan. Finally, earnings releases include IBM, AT&T and Ford.